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Why Americans Are Chronically Underinsured

Written by: Brian O'Connell08/21/13 - 11:00 AM EDT

NEW YORK ( TheStreet) -- Why is there such a financial gap between what Americans earn over the course of their lifetime and the amount of insurance they buy to protect those lifetime assets for their families and loved ones?

It's a question insurance industry analysts are asking, too, and the data benchmarks they're using show that financial gap could leave families woefully unprotected in the event of the loss of a breadwinner.

That leaves the average American breadwinner roughly $1.2 million short of what they need to replace their lifetime income via life insurance.

Why the disparity?

Nationwide says it has something to with Americans' perceptions of wealth. To most consumers, $300,000 seems like a lot of money, and thus a healthy number for life insurance coverage.

"Too many Americans make the mistake of assuming that simply providing what may appear to be a large lump sum of money for their beneficiaries will be enough to protect them," notes Eric Henderson, a senior vice president of life insurance and annuities at Nationwide. "Instead, they should think about how much of their income the insurance money will replace. If it doesn't replace a high percentage of it, their family faces the risk of financial disruption or a reduced standard of living."

"It's simple math, but it doesn't add up for 49 out of 50 of those we surveyed," he adds.

Nationwide says the average U.S. life insurance policy covers only about 16% of a policyholders' lifetime earnings (before retirement) And only 2% of those surveyed have covered their life insurance needs "completely."

Those low figures are attributed to consumers having other financial obligations to fulfill.

"Filling a $1.2 million income replacement gap without life insurance is a tall order for surviving family members when you consider late life expenses such as college, weddings, retirement, health care and long-term care," Henderson explains.

Yet a $99 monthly payment over 20 years will yield a $2.3 million life insurance policy to a healthy 35-year-old American, Nationwide says. That's more than enough to seal that income/insurance gap.

"It's common for Americans to insure the entire value of their largest assets," Henderson offers. "For most of us, the income we will earn before retirement is far more significant to the financial well-being of our family than any material possession. The cost for enough life insurance to replace this income may be less than you spend to insure your home or car."